Nedbank sees benefits of stingy lending policy

Nedbank is reaping the benefits of a conservative approach to lending, having improved its annual credit loss ratio and seeing revenue growth outstrip expenses. But Ecobank Transnational Inc (ETI), the loss- making pan-African unit in which it has a stake, continued to weigh on group results.

The banking group’s credit loss ratio improved from 0.77% to 0.68% during the financial year ended December 31, 2016.

“Our current credit loss ratio is a consequence of our historic loan origination practices, so the quality of credit that we’ve written over the past two to three years emerges in the current credit loss ratio. Nedbank has deliberately given up some market share in some higher risk loan categories in the last couple of years and we’re seeing the benefit of that coming through,” explained chief executive Mike Brown.

Net interest income increased by 10.6% to R26.43 billion and non-interest revenue increased by 8.1% to R23.5 billion.

Growth in overall revenue of 9.4% exceeded an 8.6% increase in expenses to R28.37 million, which was due in part to rising IT- and staff-related costs.

Based on managed operations, which include corporate and investment banking, retail and business banking and Nedbank Wealth, the group recorded a positive Jaws ratio of 0.8% compared with -0.7% previously. Its efficiency ratio improved from 56.8% to 56.4%. However, when ETI is included, the ratio deteriorates to 56.9% from 56.2%. Generally speaking, a lower efficiency ratio conveys the bank’s ability to turn resources into revenue, and is considered positive, with a ratio of 50% considered optimal.

The bank took a headline loss of R374 million as result of its 21.2% stake in ETI.

The pan-African bank, which operates across 39 countries, suffered losses related to a recession in Nigeria and devaluation of the naira. Raisibe Morathi, chief financial officer of the Nedbank Group, told Moneyweb that Nigeria accounted for 30% to 40% of ETI’s assets and earnings.

She went onto explain that the bank took a R1 billion impairment against the West African bank as the carrying value of its investment decreased from R7.8 billion to R4 billion. The market value of Nedbank’s investment, based to its share price, stood at R2.4 billion at the end of the period under review and R2.1 billion as February 24 2017.

“It is an important strategic investment and we are keen to have ETI turning around into a profitable successful business but it is a small contributor or detractor from performance. We are supportive of ETI management [and] we gain comfort from the refreshed management at ETI. They are very experienced bankers and we do believe that they will be able to put ETI in a profitable position with the passage of time,” said Morathi.

Nedbank invested in ETI in October 2014. During the first full year of reporting on ETI’s performance, it contributed R644 million – or 4% to 5% – to the group’s total earnings of R10.8 billion. Its loss during the 2016 financial year takes away about 2.5% from group earnings, she added.

Including ETI, diluted headline earnings per share (DHEPS) rose by 4.8% to R23.50. The group said return on equity, which dipped to 15.3% from 15.7% reflects a lower return on assets due to a loss in equity accounted earnings from ETI.

It expects Dheps for the 2017 financial year to be greater than or equal to 7%, the estimated growth rate in nominal gross domestic product (GDP) or consumer price index plus GDP growth.

“A deceleration in top line growth across banks means tighter expense control measures have to be implemented to support the bottomline. To achieve the earnings grow target set by the management of Nedbank it has to improve on its expense control,” said Simbarashe Chimanzi, a banking analyst at JM Busha.

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